The Chennai factory is one of Nokia’s biggest phone-making factories. Nokia appealed the seizure and has been trying to end the dispute ahead of the closure of the $7.4 billion Microsoft deal. Photo: Bloomberg

New Delhi/Chennai:Nokia Oyj is now free to sell its Indian assets to Microsoft Corp. as part of a $7.2 billion sale of its global mobile phone business, after the Delhi high court ordered India’s income-tax (I-T) department to unfreeze the assets of the Finnish company’s local manufacturing unit.

Nokia has been fighting a tax case with the I-T department. If the court had ruled otherwise, Nokia may have had to exclude the Indian assets from the deal, forcing the closure of a factory near Chennai, one of Nokia’s largest, that employs 5,800 people and produces 200 million phones a year.

The court asked Nokia India to deposit Rs.2,250 crore, the value of the Indian asset as security as it awaits the resolution of the tax case.

It also asked Nokia to guarantee that it would reserve an amount of Rs.3,500 crore in case the tax demand is higher.

To be sure, while the initial tax demand on Nokia was around Rs.2,000 crore, this has since swelled to around Rs.21,000 crore with the inclusion of penalties and interest. The demand pertains to royalty payments made by the Indian company to its parent in the period between 2006-07 and 2010-11. The tax department froze Nokia India’s assets in September.

Nokia will now prepare to transfer the assets to Microsoft and expects to close the transaction in the first quarter of 2014, the Finnish company said in an emailed statement.

“Our current understanding is that this decision allows for the transfer of the assets. However, Nokia has been asked to meet a number of conditions in the ruling, and still needs to provide the authorities with additional documentation. Nokia expects these conditions to be in line with international treaties and practices,” it said, adding that there are still a number of statutory clearances that remain before the assets can be transferred.

Experts described the move as a reprieve for Nokia, and questioned the wisdom of both the original tax demand and its subsequent inflation.

“The dispute surrounds the issue of whether payments by Nokia India to Nokia Finland should be liable for withholding tax (being in the nature of royalty as alleged by the tax administration). This demand amounted to roughly Rs.2,000 crore. The demand ballooned further when a separate wing of the tax administration chose to disallow the so-called royalty payment on the ground that there was failure to withhold tax,” said Mukesh Butani, chairman of tax advisory BMR Advisors.

“The issue of Nokia’s taxability is a contentious one, which is not only pending before the appropriate authority for consideration but is also the subject matter of mutual agreement procedure between the competent authorities of India and Finland. It is therefore a pragmatic and practical approach taken by the Delhi HC to ensure that the interests of both parties, the Indian revenue department and Nokia are not harmed,” said Daksha Baxi, executive director of Khaitan and Co., a Delhi-based law firm.

The case of Nokia is one of many tax disputes going on between India’s tax department and large multinationals that have hurt India’s image among investors. Shell India and Vodafone India are also involved in similar cases.

The court order was also welcomed by the Nokia factory worker’s union.

“It is great relief for the workers as we will (now) be part of Microsoft,” said M. Saravana Kumar, president of Nokia India Thozhilalar Sangam, a union representing 8,000 workers at the Sriperumbudur plant near Chennai.

Nokia has invested more than $330 million in the plant since it was set up in 2006.